Ownership of investment real estate has always allowed owners significant tax advantages, which include:
Equity Wealth Tax Deferement:
As your property goes up through appreciation and inflation, and your equity grows further through debt reduction, the resulting overall gain in your equity is not taxable until you sell the property.
i.e. If your equity in a property has increased by $100,000 over 5 years, your net worth will have also gone up by $100,000, but you do not pay tax on that net worth increase until you realize the gain through selling your property.
However, until you sell the property, you can use that net equity gain of $100,000 to secure further loans for other investments.
Capital Gains Taxation Rate:
Rather than pay tax at your personal marginal taxation rate on any profit you make on the sale of your property, by claiming a capital gain (on Canadian properties for Canadian residents), the first 50% of your gain is “tax exempt” with the balance being taxed at your marginal rate. Using the same analogy above, if you sell the property and earn a $100,000 net gain, the first $50,000 is tax exempt, and you would pay tax on the remaining $50,000 at your marginal tax rate.
Deductible Expenses:
As an investment property owner there are certain expenses you can claim as an expense that will reduce your personal taxes payable such as:
- Advertising
- Management Fees
- Minor Repairs
- Interest Payments
- Accounting Fees
- Auto Expenses
- Maintenance
- Travel Costs
Be sure to always consult an accountant or a lawyer for detailed tax information.